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Europe to keep its foot on the accelerator for longer, but not harder

04 December 2015

This week the European Central Bank (ECB) announced a continuation of its accommodative monetary policy, extending the duration of its €60 billion a month “QE” stimulus programme until at least March 2017 or until inflation reaches the ECB's target of below or close to 2%. The ECB also extended the range of assets it will purchase to include regional and local government debt, as well as cutting the deposit rate. Jason Hollands, Managing Director at Tilney Bestinvest, shares his views.

“These measures are aimed at flushing liquidity into the system to provide further support to the Eurozone economy and to try to resurrect inflation which has evaporated in part due to tumbling commodity prices. The outlook for global growth has been deteriorating as a knock-on effect from the slowdown in China and the ECB is determined that this should not derail the fragile economic recovery in the Eurozone.

“Recent data has shown a rise in unemployment figures in France, the Eurozone’s second largest economy, and the latest Eurozone inflation data came in lower than expected. This meant further action today was widely expected in the markets, though many investors had hoped for more aggressive measures such as an increase in the level of the monthly QE programme rather than an extension of the timeline. Overall this news is somewhat underwhelming and the immediate reaction from the currency markets has been a strengthening in the Euro, but nevertheless the policy remains a loose one.

“Importantly continued loose monetary policy in Europe comes ahead of a hotly anticipated meeting of the U.S. Federal Reserve Bank on 16 December, which in many ways is the main game for market watchers. At this meeting it is expected that the U.S. will start moving in an altogether different direction by raising U.S. interest rates for the first time since 2006.

“At a speech this week in Washington DC Fed Chairwoman Janet Yellen, delivered an upbeat assessment of the U.S. economy, expressing “confidence in a return of inflation” which is perceived as guidance that the U.S. is now ready for higher borrowing costs, albeit any pattern of hikes might well be gradual. This would represent an important step in the process of “normalising” U.S. policy after years of ultra-low interest rates and the extraordinary stimulus measures that were implemented in the wake of the financial crisis.

“While there is a fierce debate over how effective QE stimulus packages have been for the real economy, where implemented they have proved supportive for stock markets and the prices of other assets (but weakened currencies), so a potential divergence in approach between the U.S. and Eurozone at this time is significant. This is one of the reasons that investors might be more upbeat about European equities than U.S. equities in the current environment notwithstanding the disappointment today that the ECB didn't come up with something more punchy.

“While not at bargain prices, European shares also look less expensive than U.S. shares which have surged higher during the years of low U.S. interest rates as companies have been able to issue inexpensive debt and use this to finance the buying back of their own shares. With borrowing costs expected to nudge upwards in the U.S., that support for U.S. markets could be set to slow, meaning top line revenue growth really needs to deliver to justify current stretched valuations. Therefore in our view, European equities still have an edge over U.S. stocks.

Five funds for investing in Europe

“Investors have plenty of choice when it comes to high quality European equity funds. Amongst those rated highly by our research team, here are five funds with different approaches:

Small and mid-caps: Baring Europe Select This fund aims for long term capital growth by investing in small and medium sized European companies with the potential for strong profit growth but where the investment team believes the current share price does not reflect this. The fund is incredibly well diversified, with over 100 holdings, none of which represent more than 2% of the fund. Examples of holdings include Finnish telecoms firm Elisa, Kingspan Group - a global leader in insulation and energy efficient building material; and Christian Hansen which specialises in probiotics and enzymes for food, beverages and dietary supplements.

High conviction: FP Argonaut European Alpha This fund, managed by specialist European equity boutique Argonaut, pursues a high conviction, “unconstrained” investment approach investing across large, medium-sized and smaller companies where the managers believe there is potential for “earnings surprises”. The fund has just 35 holdings which include corrugated paper packaging group Smurfit Kappa, Italian internet mail order business YOOX Net-a-Porter and Italian banking group Intesa Sanpaolo.

Behavioural finance:JPM Europe Dynamic ex UK This fund is managed using a distinctive strategy that draws on “behavioural finance”. It seeks to exploit pricing opportunities created by the herding behaviour and biases of analysts and investors. The fund tends to trade stocks more regularly than a typical fund. Top holdings include healthcare companies Sanofi, Novo Nordisk and Novartis and financial services groups AXA and UBS.

Hunting for dividends:Standard Life European Equity Income This fund targets large and mid-sized European business, with the ability to grow their dividends, where the manager believes change is happening either in the business or impacting their industry, which should prove positive. Examples include German chemical company Covestro, which was recently spun out of Bayer to become independent, and Telecom Italia which has recently seen rival firm Vivendi buying its shares.

Big brand focus:Threadneedle European Select. This has long been one of our highest rated, core European equity funds. It is a concentrated portfolio of around 40 mostly larger European companies, with strong competitive advantages, recurring revenues and consistent above average earnings growth. Well recognised brands often fit this profile and constitute a large proportion of the portfolio. These include Unilever, whose diverse brands include Marmite, Wall’s ice cream, Persil and PG Tips; Richemont, whose luxury brands include Cartier, Jaeger-LeCoultre and Montblanc; and brewer Anheuser-Busch InBev which is in the midst of a mega merger with SABMiller.”

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Past performance should not be considered a reliable indicator of future performance. This article is not advice to invest or to use our services.

Different funds may carry different levels of risk depending on the geographical region and industry sector(s) in which they invest. You should ensure that you understand the nature of any fund before you invest in it and make yourself aware of these specific risks prior to investing.

Smaller companies shares can be more volatile and less liquid than larger company shares, so smaller companies funds can carry more risk.

About Tilney Bestinvest

Tilney Bestinvest is a leading investment and financial planning firm that builds on a heritage of more than 150 years. We look after more than £9 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.

We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.

We have won numerous awards including UK Wealth Manager of the Year, Low-cost SIPP Provider of the Year and Self-select ISA Provider of the Year 2013, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.

Headquartered in Mayfair, London, Tilney Bestinvest employs almost 400 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.

About Tilney

Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years. Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.

We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the YourMoney.com Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.

Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.

Jason Hollands

Katy Moore

The value of your investment can go down as well as up, and you can get back less than you originally invested.

Past performance or any yields quoted should not be considered reliable indicators of future returns. Restricted advice can be provided as part of other services offered by Tilney Group, upon request and on a fee basis. Before investing in funds please check the specific risk factors on the key features document or refer to our risk warning notice as some funds can be high risk or complex; they may also have risks relating to the geographical area, industry sector and/or underlying assets in which they invest. Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change.

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